It’s no secret that international markets can be volatile, with everything from simple demand to political unrest holding the potential to affect how well any one stock or commodity is performing. While most prices tend to be affected by a number of different factors, global events have the potential to affect not just one market, but any of international markets all at once.
As an investor, understanding these events and their potential impacts is crucial to safeguarding and growing your wealth. Whether you’re a seasoned investor or just starting your investment journey, knowing the influence of global events on the stock market and how to reach them will help you navigate global finance, make informed decisions, and thrive amid economic uncertainties.
How Global Events Affect the Market
Here’s how global events affect the market:
Political events are perhaps one of the most powerful influences on the stock market.
The stock markets can go upside down with a single election. It can even cause an unstable currency, political turmoil, and a complete change in ideology for citizens. And eventually for the traders as these events have a direct impact on the stock market.
In addition to it, the leader of any nation can also have a huge impact on the stock markets internationally. This can happen via the ripple effect. Some political parties or party leaders are seen as more fiscally responsible than others, and in a lot of cases, those who are clearly concerned with improving the performance and strength of an economy will boost the value of a country’s currency.
Unexpected or sudden elections tend to lead to economic difficulty regardless of who is in the running. the uncertainty alone can often cause traders and market investors to reduce their activity and spending. This has a huge impact on the stock market. In some countries, there are measures in place to help speed up the process of settling the economy.
There’s no denying that this global issue has an effect on how the international markets perform. Everything from stress placed on power companies, to talks of a climate change tax, the uncertainty surrounding global warming is enough to cause market-based unrest.
Other factors that are caused by global warming can deeply impact how traders and investors view their investments in the stock market:
- Damaged property and infrastructure through a rise in natural disasters
- Lost productivity due to drastic temperature changes
- Mass migration and security threats through future ‘climate refugees’
War And Terrorism
Much like the impact of a natural disaster, a war or terrorism-caused event can have a devasting effect on a country’s morale, infrastructure, and, of course, its currency and economy. The damage caused to buildings and other physical infrastructure, as well as costs associated with a rise in policing, army presence, and even the ammunition needed to fight wars, can be a drain on any country’s monetary budget.
Loans and debt can build up long after a war has finished. The long-term damage caused by the event of war takes years to recover. In such economies, money is hardly injected into building up stock markets or economies. Rather there is a shortage of money and it is utilized to meet the basic needs of a running economy.
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Just like politics, leading brands and how they’re behaving can affect the economy globally. The Facebook privacy battle in 2018 wiped away billions of dollars in its market cap. This huge drop in one company’s market causes a significant impact on the overall stock market. Since Facebook is a global company, its global reach meant that traders, investors, and interested parties from across the globe were also affected.
If an international event causes an economic slowdown in one or more countries, it can send ripples through the global economy and stock markets. Investors may become more risk-averse, causing stock prices to fall.
Political events with global ramifications, such as Brexit or geopolitical conflicts, can impact the stock market. For example, the Brexit referendum in 2016 caused volatility in financial markets as investors grappled with the uncertainty surrounding the UK’s withdrawal from the European Union.
Trade tensions between major economies can create market volatility. Tariffs, retaliatory measures, and uncertainties about trade policies can affect companies’ profitability and investor sentiment, leading to fluctuations in stock prices.
International Health Crisis
Pandemics and other health crises can significantly affect the stock market. These things can make it hard for businesses to run, cause problems in the supply chain, and make people less interested in buying something. For example, COVID-19 became widespread in early 2020. The whole world saw the damage it caused to every country’s citizens. As a result of this health crisis the economies of every country suffered. There were business shutdowns and disruptions in the supply chain. All of these had a huge impact on the global financial markets.
Changes in currency exchange rates
Currency exchange rate changes can impact international trade, which can affect how much money a company makes and how much its stocks are worth. International events can also cause fluctuations in currency exchange rates, which can affect the profitability of companies that do business in multiple countries and lead to a decline in stock prices.
Major world events have always impacted stock markets, from a risk and return perspective. If we go back in time – say the past 100 years – we’ve had many significant market-impact events, namely:
The Great Depression
The Great Depression was the worst economic downturn in the history of the industrialized world, lasting from the stock market crash of 1929 to 1939. The causes of the Great Depression included slowing consumer demand, mounting consumer debt, decreased industrial production, and the rapid and reckless expansion of the U.S. stock market.
The stock market, centered at the New York Stock Exchange on Wall Street in New York City, was the scene of reckless speculation, where everyone from millionaire tycoons to cooks and janitors poured their savings into stocks. As a result, the stock market underwent rapid expansion, reaching its peak in August 1929. When the stock market crashed in October 1929, it triggered a crisis in the international economy.
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The Abolishment of the Gold Standard
With the First World War, the classical gold standard ended. The abolishment of the gold standard was a result of various economic and political factors. The gold standard had some advantages, such as stabilizing currency values and promoting trade and investment, but it also had some serious drawbacks, such as limiting the ability of central banks to respond to changing economic conditions and creating periodic deflations and contractions.
As a result of the abolishment of the gold standard the stock market performance became more dependent on the economic fundamentals and expectations, rather than the movements of the gold price. It also increased the volatility and uncertainty of the exchange rates, which affected the stock market returns and risks.
Edward VIII Abdicating the Throne
The abdication of King Edward VIII in 1936 was a historic event that had some impact on the global stock market. According to some analysts, the abdication of King Edward VIII had a negative effect on the British stock market, as it created uncertainty and instability in the political and social spheres. The abdication was seen as a sign of weakness and division in the British monarchy, which had been a symbol of stability and continuity for centuries. The abdication also raised questions about the future of the British Empire, which was already facing challenges from the nationalist movements in its colonies.
World War II
World War II was a global conflict that lasted from 1939 to 1945 and involved more than 30 countries. World War II also had a significant impact on the stock market, as it affected the economic activity, trade, production, consumption, and expectations of different countries and regions.
According to some sources, the U.S. stock market generally rose during World War II, despite some periods of volatility and uncertainty. The Dow Jones Industrial Average, a major index that tracks the performance of 30 large U.S. companies, gained almost 50% from the start of the war in 1939 to its end in 19451. The U.S. stock market bottomed in April 1942. However, the impact of World War II on the stock market was not uniform across different countries and regions. Some countries, such as Germany and Japan, saw their stock markets collapse as they suffered military defeats, economic devastation, and political upheaval.
The Recession of the 1950s
The recession of 1950 was a brief but severe economic downturn that lasted from July 1950 to October 1950. The impact of the recession of 1950 on the stock market was significant but short-lived. The S&P 500 index, which tracks the performance of 500 large U.S. companies, declined by about 14% from its peak in June 1950 to its trough in October 1950. The stock market also experienced high volatility and uncertainty, as it reacted to the news and events related to the Korean War and the domestic economy.
However, the stock market also recovered quickly from the recession of 1950, as the economy resumed its growth and prosperity after the end of the recession.
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Hyperinflation of the 70s
Hyperinflation can have severe negative effects on the economy and society, such as reducing the real income and wealth of people, creating shortages and hoarding of goods, disrupting the financial system and the market mechanism, and undermining confidence and trust in the government and the currency.
The impact of the high inflation in the 1970s on the stock market was negative and significant, as it reduced the real returns and the valuation of the stocks, and increased the volatility and uncertainty in the market. The S&P 500 index, which tracks the performance of 500 large U.S. companies, declined by about 50% from its peak in 1972 to its trough in 1974 and remained below its 1972 level until 1982.
The UK being bailed out by the IMF
The UK being bailed out by the IMF in 1976 was a major economic and political event that had some impact on the stock market. However, the impact was not very large or lasting.
Black Wednesday was a financial crisis that occurred on September 16, 1992, when the UK government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism (ERM), a system that aimed to stabilize the exchange rates of the European currencies.
The UK stock market, measured by the FT 30 index, declined by about 9% from the start of 1992 to the end of the year, but it also experienced some periods of recovery and growth.
Black Monday was a historic stock market crash that occurred on October 19, 1987. It was the largest one-day percentage decline in the Dow Jones Industrial Average (DJIA), which dropped by 22.6%. The crash affected markets around the world, starting in Hong Kong and spreading to Europe and the United States. The impact of Black Monday was significant and lasting, as it triggered a global recession, increased market regulation, and changed the way investors traded stocks.
The terrorist attack on Sept. 11, 2001, was a tragic event that shocked the world and had a significant impact on the stock market.
The NYSE and the Nasdaq remained closed until Sept. 17, the longest shutdown since 1933. On the first day of trading after 9/11, the Dow Jones fell 684 points, a 7.1% decline, setting a record at the time for the biggest loss in one trading day. The first week of trading after 9/11 saw the biggest losses in NYSE history, with the Dow Jones down more than 14%, the S&P 500 down 11.6%, and the Nasdaq down 16%. An estimated $1.4 trillion in value was lost during this period
The dot-com bubble was a period of extreme speculation and overvaluation of internet-based companies in the late 1990s and early 2000s. It had a significant impact on the stock market, especially the NASDAQ index, which was dominated by technology stocks.
The dot-com bubble crash had a devastating effect on the stock market and the economy. The NASDAQ index lost 78% of its value from its peak in March 2000 to its trough in October 2002, wiping out $5 trillion in market capitalization.
2008 Global Financial Crisis
The 2008 Global Financial Crisis was a severe contraction of liquidity in global financial markets that originated in the United States as a result of the collapse of the U.S. housing market. The impact of the crisis on the stock market was significant and lasting, as it triggered a massive sell-off of stocks, a loss of confidence among investors, and a decline in corporate earnings and dividends.
The stock market crash of 2008 occurred on September 29, 2008. The Dow Jones Industrial Average fell by 777.68 points in intraday trading. The stock market crash of 2008 had a lasting impact on the economy and society. It eroded the wealth and savings of millions of people, especially those who were close to retirement or had invested heavily in the stock market.
European Sovereign Debt Crisis
The European sovereign debt crisis was a period of financial turmoil and instability that affected several European countries, especially those in the Eurozone, between 2009 and 2012. The crisis was caused by a combination of factors, such as the global financial crisis of 2007-2008, the excessive public debt and deficit levels of some countries, the lack of fiscal and monetary integration in the Eurozone, and the loss of market confidence and investor trust. The crisis had a significant impact on the stock market, both in Europe and globally, as it triggered a sharp decline in stock prices, an increase in market volatility, and a reduction in corporate earnings and dividends.
The stock indices of Greece, Portugal, Ireland, Spain, and Italy, which were collectively known as the PIIGS, experienced the largest losses during the crisis, as they faced the highest sovereign risk and the most severe austerity measures.
Chinese Stock Market Crash
The Chinese stock market crash refers to the sharp decline in share prices that occurred in China since July 2021. The crash has raised concerns about the stability of the Chinese economy and its impact on the global financial markets.
However, it has led to reduced imports, investor confidence shattering, an increase in the dollar rate, and falling commodity prices.
Brexit uncertainty refers to the lack of clarity and predictability about the future relationship between the United Kingdom and the European Union after the UK voted to leave the EU in 2016. Brexit uncertainty can have various impacts on the stock market, both in the UK and globally.
All of these events have impacted investors who have invested in equities, especially those investing in their retirement strategy. Some, obviously, are more impactful than others!
Preparing for Future Global Events: Strategies for Investors
Investors can never predict with certainty how global events will unfold, but understanding their potential impact on stock prices can help prepare for the unexpected. Investors can plan ahead for unexpected events to lessen the impact of global events:
- One strategy is diversification, which involves spreading investments across various sectors and geographic regions to reduce exposure to any single event. This strategy can help mitigate risks associated with global events and ensure a well-balanced portfolio. Some reliable sources include Financial news outlets: Bloomberg, CNBC, Financial Times, and The Wall Street Journal; Government and international organizations: Websites of central banks, the International Monetary Fund (IMF), and the World Bank; and Industry-specific publications and research.
- Another strategy is staying informed. Keeping up with current events and understanding their potential impact on the global economy and specific sectors is vital.
- Taking a long-term perspective is crucial when dealing with geopolitical risks. Focusing on the fundamentals of individual assets, such as companies’ financial health and growth prospects, rather than reacting to short-term market noise, can lead to better investment decisions. Stock market performance can be volatile in the short term, but historical data has shown that over the long term, markets tend to recover and deliver positive returns. Holding onto quality investments and avoiding knee-jerk reactions can help investors weather the storm during periods of geopolitical turmoil.
- Investors should also consider long-term trends, such as technological advancements or environmental policy shifts, which could influence stock prices in the future. By staying informed and adjusting strategies accordingly, investors can better navigate the impact of global events on stock prices.
- Geopolitical risks can be complex and challenging to navigate for individual investors. Seeking professional advice from financial advisors or wealth managers can provide valuable insights and guidance tailored to individual investment goals and risk tolerance.
- Implement risk management strategies, such as setting stop-loss orders and rebalancing portfolios, to protect your investments during market turbulence.
- Leverage technology, such as financial news aggregators, sentiment analysis tools, and AI-powered analytics, to monitor global economic events and gain insights into market trends and opportunities. Using these tools, investors can stay informed about global economic events and gain insights into market trends and opportunities.
- Adapt to the changing global economy by embracing sustainable investing and considering environmental, social, and governance (ESG) factors in your investment decisions.
- Stay open to technological innovations and emerging industries, as they can offer new investment opportunities and enhance your investment management process. Artificial intelligence (AI) and machine learning technologies are revolutionizing the financial industry by enabling faster and more accurate analysis of vast amounts of data. Leveraging technology can significantly assist investors in monitoring global economic events and staying ahead in the financial markets. By utilizing financial news aggregators, social media, sentiment analysis tools, and AI-powered analytics, investors can comprehensively understand global economic events and make well-informed investment decisions.
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Everything from political turmoil to natural disasters, war, and corporate unrest can affect how the markets are performing internationally. Some countries have a better way of handling such mega events which reduces the impact it has on economies and the stock market. Having a plan in place to operate proactively can help traders stay ahead or gain a better understanding of how any one market operates. However, not all countries are equipped with such contingency planning.
Understanding global economic events and their impact on financial markets is crucial for investors who want to protect and grow their wealth. In the face of global economic uncertainties, staying proactive and prepared is essential. Investors who take the time to understand global economic events and their potential impact on financial markets are better positioned to make well-informed decisions that protect and grow their wealth. To summarize the above details, investors can stay ahead of global economic events by:
- Staying informed through reliable sources of information and data.
- Diversifying investments across different asset classes and regions.
- Implementing risk management strategies, such as setting stop-loss orders and rebalancing portfolios.
- Maintaining a long-term perspective and focusing on fundamentals rather than short-term market noise.
- Leveraging technology to monitor global economic events and gain insights into market trends and opportunities.
- Adapting to the changing global economy by embracing sustainable investing, considering ESG factors, and staying open to technological innovations.
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